salt

worthiness

Senior Vice President - Equity Analytics

Posts : 2581Equity Stars : 7139Reputation : 115Join date : 2011-04-08

@rainmakerHeavy borrowings ( mid to long term) set out certain obligations to the borrower such as meeting "financial covenants" made by the lender. Is there no disclosure requirements in the financial report of these commitments made on financial covenants? Lenders are vigilant on every quarterly & accumulated results ensuring that borrower is not default on the dash board agreed upon.

rainmaker

LOLC has changed a lot. We can only know the future of the stock in the next annual report.

However, note that LOLC has a lot of development loan type of debt. This is generous debt.

LOLC has debt from the controlling family's private company - not a problem as the controlling family have everything to lose.

LOLC has debt from Orix corporation - not a problem because the corporation is a major shareholder and the debt is essential to the funding of the leasing arm that helps Orix dispose of its surplus vehicles that it bulk buys from Isuzu and Toyota - vehicles they can't lease out in Japan.

LOLC has debt from the banks - this is a problem as Banks can go to the high court for a suspension of trading (*TWOD and others on bank borrowings take note). SL banks have no sympathy and no amount of phone calls really stops them from pulling the plug (Vanik saga). Read the Govt Gazette for news on the latest victims. Fortunately LOLC would have take some of its debt from SEYB.

As I said, the coming Annual Report and next quarter results will reveal a lot. If it's good, you will see foreign buying.

Liber Abaci

Sure , it is good work to raise these issues for discussion , However does it make sense? Here are my views .

“The profit drop from 31/12/2011 to 31/12/2012 will impact shareholders rather than debt holders. “

When there is reference to profit of a listed company , it is normally profit attributable to the shareholders , which is arrived after deducting interest cost. As such , If there is a drop in profit , the impact is directly to shareholders, ( not in any way to debt holders ) in any financial year.With regard to LOLC profit in 2012, one pertinent question is , of the profit before tax of nearly Rs 3 billion, around 44% is represented by Negative Goodwill , which is not an earned income.

“The profit is still high enough to meet debt payments - at current levels. “Debt payments are not made out of profits. Its’ made out of cash flow.

“Any further decline in profit has to be met with a decline in finance costs.” It’s the other way. If finance costs decline , profit will increase.

I think LOLC has done what every SL firm should do. Expand the balance sheet with debt. In a high inflation environment debt wins - speak to those who bought houses on debt in the 1990s.

Can’t understand , Why should every SL firm should expand balance sheet with debt ? Isn’t it foolish to compare with a listed company’s debt /equity financing ,with a home owner ?There is a optimum level for debt :equity for any company, based on the business they are engaged in and the volatility of outside economic environment. That’s why these reserve requirements and Tier I ,Tier II Capital requirements in respect of Banks, financial service companies , strictly monitored by Central banks. Besides lenders will not provide unlimited debt as borrower requests. They also look at business prospect, optimum debt :equity levels for the particular industry based on their past experience and norms. In case of bank borrowings ,there has to be collateral to the satisfaction of lender. A company’s borrowing decisions are not based on whether it is high inflation or low inflation environment . They are primarily based on future business prospects , revenue \profit forecasts, and financing structure is decided based on those facts. If it is low inflation environment , company is in a position to finance major /entire cost through equity ( based on their tax status). My observation is LOLC asset side has expanded by only 10% during 2012, and the liabilities has grown by mere 3 %. Hardly any evidence to say balance Sheet has expanded with debt. They should now develop a "debt sinking fund" to cushion the impact of redemption payments. They must replace $ and LKR debt with Yen debt as the long term outlook is the Yen being weaker.

If they can be so sure about long term Yen /dollar exchange rate what’s the need to engage in lending / leasing to risky Sri Lankan clients ? Better to switch to currency market . This is applicable to investors in CSE also !!!I have a feeling that those 1B debentures given by the controlling family have an option to convert debt into equity. Maybe a hidden card if they have to dilute the stake with a private placement ????

My opinion is …You don’t have to feel, you can check. For a listed company debenture terms ( even terms of bank loans ) are public information . How can they go for a private placement diluting existing shareholders , without a right issue or consent of existing shareholders ?

rainmaker

Sure , it is good work to raise these issues for discussion , However does it make sense? Here are my views .

“The profit drop from 31/12/2011 to 31/12/2012 will impact shareholders rather than debt holders. “

When there is reference to profit of a listed company , it is normally profit attributable to the shareholders , which is arrived after deducting interest cost. As such , If there is a drop in profit , the impact is directly to shareholders, ( not in any way to debt holders ) in any financial year.With regard to LOLC profit in 2012, one pertinent question is , of the profit before tax of nearly Rs 3 billion, around 44% is represented by Negative Goodwill , which is not an earned income.

“The profit is still high enough to meet debt payments - at current levels. “Debt payments are not made out of profits. Its’ made out of cash flow.

“Any further decline in profit has to be met with a decline in finance costs.” It’s the other way. If finance costs decline , profit will increase.

I think LOLC has done what every SL firm should do. Expand the balance sheet with debt. In a high inflation environment debt wins - speak to those who bought houses on debt in the 1990s.

Can’t understand , Why should every SL firm should expand balance sheet with debt ? Isn’t it foolish to compare with a listed company’s debt /equity financing ,with a home owner ?There is a optimum level for debt :equity for any company, based on the business they are engaged in and the volatility of outside economic environment. That’s why these reserve requirements and Tier I ,Tier II Capital requirements in respect of Banks, financial service companies , strictly monitored by Central banks. Besides lenders will not provide unlimited debt as borrower requests. They also look at business prospect, optimum debt :equity levels for the particular industry based on their past experience and norms. In case of bank borrowings ,there has to be collateral to the satisfaction of lender. A company’s borrowing decisions are not based on whether it is high inflation or low inflation environment . They are primarily based on future business prospects , revenue \profit forecasts, and financing structure is decided based on those facts. If it is low inflation environment , company is in a position to finance major /entire cost through equity ( based on their tax status). My observation is LOLC asset side has expanded by only 10% during 2012, and the liabilities has grown by mere 3 %. Hardly any evidence to say balance Sheet has expanded with debt. They should now develop a "debt sinking fund" to cushion the impact of redemption payments. They must replace $ and LKR debt with Yen debt as the long term outlook is the Yen being weaker.

If they can be so sure about long term Yen /dollar exchange rate what’s the need to engage in lending / leasing to risky Sri Lankan clients ? Better to switch to currency market . This is applicable to investors in CSE also !!!I have a feeling that those 1B debentures given by the controlling family have an option to convert debt into equity. Maybe a hidden card if they have to dilute the stake with a private placement ????

My opinion is …You don’t have to feel, you can check. For a listed company debenture terms ( even terms of bank loans ) are public information . How can they go for a private placement diluting existing shareholders , without a right issue or consent of existing shareholders ?

You don't have to read between every line I state. Just get the point. I wrote the above very quickly and I guess I could have mentioned it more clearer. The income and cash flow statement shows that they can make payments. And yes profits are after the net finance cost.

If the profits start to decline (like they have been), then the future outlook is that the financing cost will be tough to meet LOLC placed 3Billion in April/May 2012 with Saakya Capital - a private firm. Without the annual report of 2012 I cannot give a definitive response on the terms and conditions. If you wish to contest this then you need an EGM which requires 10% of the vote.

Refer to my other post about the LOLC debt levels. The debt is prudent to a certain extent. The only issue was with a few of he Leveraged Buyouts and the separation of LOFC from LOLC. With the separation, the cash transfer between the in-debt and the cash-generator is affected-> hence the credit downgrade of LOLC but not LOFC.

Those who don't believe in debt will should continue saving and don't buy LOLC.

The Alchemist

1. If the profits start to decline (like they have been), then the future outlook is that the financing cost will be tough to meet 2. Refer to my other post about the LOLC debt levels. The debt is prudent to a certain extent. The only issue was with a few of he Leveraged Buyouts and the separation of LOFC from LOLC. With the separation, the cash transfer between the in-debt and the cash-generator is affected-> hence the credit downgrade of LOLC but not LOFC.

@ Rainmaker - Further to Liber Abaci's excellent assesment, just a few points to your above post.

1. Yes Profits have started to decline as you say. In fact if you refer the the Dec 2012 Financial Statements, you will note that they have actually made an operational loss. The NPBT Rs 725 Mill arrived at considering Negative Goodwill of Rs 1.33 Bill, which is non-cash. The Hotels will only provide petty cash. in fact they maybe a further drag on their earnings. The hotels are only an future asset play for them.

2. You say the Debt is prudent to a certain extent. How can you say this and then state that for the survival of the firm, the financing cost has to decrease if lower profits are to be accommodated. If that is the case, then the current level of Debt is not prudent.

3. Th separation between LOFC and LOLC makes no difference whatsoever since LOLC owns 90 % of LOFC. The Credit Rating differential between the two is that LOLC has assumed a significant Debt to finance non-core Asset / Business expansion, and that the cash flow from these assets are negatively impacting their ability to service the Debt assumed.

4. They may have to do a combination of Asset Sales and raise U.S Dollar Debt overseas and retire the more expensive local debt with an adequate hedging mechanism for the Forex exposure.